House Committee Votes to Cut Emergency Lending Programs

Even as the Department of Housing and Urban Development was publishing an announcement of the program's regulations in the Federal Register, the House Financial Services Committee was voting to kill the Emergency Homeowner's Loan Program (EHLP). 

The program was intended to help homeowners who are temporarily un- or underemployed stay in their homes. It was originally established in 1975 before being resurrected by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which authorized $1 billion in EHLP funding.  The Program is scheduled to go into effect on April 4, 2011.  The bill needs to pass the House as well as the Senate, which is controlled by Democrats, before being sent to President Barack Obama for signature.

The House Financial Services Committee voted 33-22 along straight party lines to kill EHLP and one other foreclosure prevention program, the FHA's Short Refi Option.  The latter was designed to refinance loans where home values have dropped below the principal balance into more affordable FHA loans if the existing mortgage holder will write off 10 percent or more of the loan principal.   Since only 44 borrowers have qualified for the program since it began last fall and none have defaulted the program has cost the government nothing.  "Congress needs to stop funding programs that don't work," committee Chairman Spencer Bachus (R-AL) said.

The Committee also delayed an expected vote to kill the Home Affordable Modification Program (HAMP) until wednesday of this week.  HAMP has been less effective than was hoped, largely due to problems with the servicers in charge of implementing the modifications.  Recent changes in the program had beefed up both the efficiency of the process and improved the quality of the resulting loan modifications.

While they may be moot, here are the details of EHLP as published in the Register.

The program will make available up to $50,000 in the form of a declining balance, deferred payment, non-recourse subordinate loans to homeowners who have experienced a substantial reduction in income due to involuntary but temporary unemployment or underemployment because of adverse economic conditions or a medical condition (The Event.)  Prior to the Event the homeowner must have had a total income equal to or less than 120 percent of the local area median income and The Event must have resulted in at least a 15 percent reduction in that income.  The homeowner must be at least three months delinquent on his mortgage and in danger of foreclosure. There should be evidence that the homeowner's financial situation is temporary and that he will have a reasonable expectation of resuming mortgage payments.  The homeowner must be an owner occupant of the subject property and have a back-end ratio including payment on any junior lien or no more than 55 percent of pre-Event income.  

HUD will contract with a fiscal agent and/or work with existing agencies in the states to disburse funds to homeowners.  Each borrower will have a fund established into which he will contribute 31 percent of his monthly household income at the time he applied to the program (but no less than $25) each month.  The agent will disburse 100 percent of the mortgage payment and any taxes, insurance, condo fees, late fees, etc out of this fund directly to the servicer.

The assistance to any homeowner will terminate at the earlier of the receipt of $50,000 or 23 months after the date of the first payment.  If at any time the homeowner's income increases above 85 percent of the pre-event income, payments will be phased out over a two month period.

There are several alternatives for repayment.  If the homeowner remains un- or underemployed after 20-22 months in the program a HUD housing counselor will assist him in exploring alternative options such as loss mitigation, short sale, traditional sale, or deed-in-lieu of foreclosure.  If the homeowner maintains his 31 percent payment during his eligibility for the program and his full monthly mortgage payments after returning to the pre-event income level the principal balance of the EHLP loan will decline by 20 percent of the original principal amount each year until the loan is extinguished.  If the home is sold or the mortgage refinanced with cash out, HUD will recoup its investment before the homeowner receives any cash from the transaction.